DBRS Comments on City National Corporation’s 2Q12 Earnings – Senior at “A”

DBRS, Inc. (DBRS) has today commented on the 2Q12 earnings of City National Corporation (City National or the Company). DBRS rates the Company’s Issuer & Senior Debt at “A” with a Stable trend. City National reported net income of $54.8 million for the quarter, up from $46.3 million in 1Q12 and from $47.5 million in 2Q11. Three unusual items added $6 million to net income in 2Q12 related to the FDIC acquisitions, transaction costs associated with recent acquisitions, and a large loan recovery that was previously charged off.

Highlights of the quarter include record period-end loans, deposits and assets reflecting strong loan and deposit growth, as well as acquisitions. Moreover, loan originations were the highest in the Company’s history for the second quarter in a row. Specifically, average loans, excluding loans covered by loss sharing agreements, increased 6% during the quarter to $13.1 billion. Excluding acquired loans, City National still would have had organic average loan growth of 4%. Moreover, the growth was broad-based with all non-covered loan categories increasing during the quarter with the exception of construction loans. The Company expects loan demand to slow given the uncertain operating environment. Meanwhile, average core deposits increased another 4% to $20.2 billion.

During the quarter, City National completed its acquisition of First American Equipment Finance, a mid-ticket equipment leasing company that added $306 million to period-end loan balances. Additionally, the Company announced the acquisition of Rochdale Investment Management, an investment management firm with $4.9 billion of assets under management for affluent and high net worth individuals, which closed on July 2, 2012.

With 78 offices in five states already, the Company expects to open five more branches over the next twelve months, including three in the San Francisco Bay Area. Additionally, City National will open two more branches in Manhattan next year.

Total revenue totaled $291.2 million, an increase of 5% from 1Q12. Net interest income (FTE) increased 8% to $221.4 million benefiting from margin expansion and loan growth. Indeed, the margin expanded a considerable 17 basis points during the quarter to 3.91% reflecting a recovery of a previously charged-off loan and higher interest income from the covered loan portfolio. Excluding the recovery and higher covered loan prepayments, the margin would have been 3.66% with the low rate environment expected to continue pressuring the margin in coming quarters. Meanwhile, noninterest income increased across all core fee-based businesses.

Asset quality metrics remain very sound with nonperforming assets (NPAs) declining and the Company once again experienced net recoveries. Specifically, NPAs (excluding covered loans) declined $8.6 million to $133.3 million, or just 0.98% of total loans and leases and OREO. With strong loan growth, City National recorded a $1 million provision for credit losses. Meanwhile, the Company had net recoveries of $2.7 million, its third consecutive quarter of net recoveries. Recoveries in commercial and commercial real estate mortgages more than offset $4.8 million of construction net charge-offs. Overall, the allowance for loan and lease losses was a strong 2.00% of total loans and leases.

Even with the acquisition and balance sheet growth, capital metrics remain sound. Specifically, the Company’s Tier 1 common shareholders’ equity ratio was 9.6% and the tangible equity to tangible assets ratio was 6.88%. Management noted that the Company already exceeds the proposed Basel III guidelines.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include the company documents, the Federal Reserve, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

For additional information on this rating, please see the linking document under Related Research.

Lead Analyst: Michael Driscoll
Approver: Roger Lister
Initial Rating Date: 6 April 2005
Most Recent Rating Update: 2 March 2012

For additional information on this rating, please refer to the linking document under Related Research.